Are you prepared for a HMRC investigation?
Charlie Thompson, Tax Consultant
By Charlie Thompson, Tax Consultant
During the COVID-19 pandemic HMRC has had to deploy large numbers of people to operate the various support schemes introduced by the Government – most notably the furlough scheme and the self-employed income support scheme. As a result, taxpayers could be forgiven for thinking that HMRC enquiries were a thing of the past, but people are soon to be shaken from that complacency as HMRC looks to ramp up its enquiry activity once again.
No-one is in any doubt that the financial support packages offered by the government in response to the pandemic will have to be paid for somehow and while the obvious route is by way of tax rises, another tool for HMRC is to make sure as many people as possible are paying their dues in full and on time. With the UK’s tax gap (the difference between what should be paid and what is actually paid) estimated to be in the region of £31 BILLION, there is plenty to chase for payment.
HMRC’s compliance effort is supported by the “Connect” system – a vast database with at least 22 billion (and growing) individual lines of information from the UK and internationally which HMRC uses to cross check information received from banks, overseas tax authorities, PayPal, Amazon and many other sources as well as public social media profiles. Any anomalies identified can easily result in a “please explain” letter landing on the doormat.
An obvious target and one which is receiving a great deal of attention are COVID support payments themselves. The sense was at one point that these represented something of a bottomless pit of money and there were undoubtedly many unscrupulous individuals who took advantage in a fraudulent way. HMRC are now devoting considerable effort to pursuing those who have made false claims (quite rightly) they will also continue to look at those who may have claimed legitimately but have got things wrong – however inadvertently… If you have any doubts about the accuracy of a claim made under the various schemes it is far better to check and if something has gone wrong, be on the front foot with HRMC rather than waiting for the dreaded brown envelope to arrive…
Another specialist area where enquiries are being raised more frequently is around R&D claims. R&D tax relief is a great incentive for businesses but as ever, any incentive which results in a cash refund is open to abuse and/or overly aggressive or “optimistic” claims. To date HMRC’s R&D team has been somewhat under-resourced but their numbers have grown considerably. Their focus is a risk-based approach to claims and those who have made legitimate claims need have no concerns (although they are not immune from enquiries). However, now more than ever, it is critical that you are happy your claim is robust and supportable but also that you can easily demonstrate this to the inspector should he or she come knocking.
It is also important not to forget what is the “bread and butter” of HMRC enquiries – enquiries into businesses where HMRC suspect either deductions have been overclaimed or revenue understated. Many of these can be rather technical and focussed on one or two specific points. Others can result in a full review of a business’s books and records and even the owners’ private affairs. In the past HMRC might review either income/corporation tax, VAT or PAYE/NIC separately but before the pandemic there was an increasing trend towards a full-on review of all taxes together. Such an enquiry can be confronting, time consuming and expensive to manage, so it has never been more important to make sure the records of a business are in the best possible shape should HMRC look to embark on an investigation.
Across all enquiries a key phrase is “reasonable care.” If a taxpayer has taken reasonable care in filing their return but has still got it wrong, then HMRC will look to recover additional tax and interest (potentially going back 4 years) but will not charge a penalty. If a taxpayer has failed to take reasonable care however, then HMRC can go back six years (four years for VAT) and can charge a penalty of between 0 and 30% of any underpaid tax. If HMRC believes the taxpayer has deliberately filed an incorrect return they can go back 20 years and the penalty can be up to 70% of any tax (100% if they think the taxpayer has concealed the deliberate act). In addition to the financial costs, deliberate tax defaulters can now find unwanted fame by being included on a quarterly name and shame list published by HMRC. In the absolute worst case of fraud then the taxpayer can go directly to jail, no passing go and no collecting £200…
Even where nothing has gone wrong there can still be considerable professional costs in dealing with HMRC enquires. WR Partners offers tax fee insurance to our clients which gives peace of mind knowing that, if the dread day does arrive, any costs are covered, and our clients have access to our wealth of experience and insights in dealing with enquiries.